Average rental values for existing homes have fallen for more than two years due to rising supply, however this trend is now reversing and declines are bottoming out.
Supply levels have moderated in 2017 following a spike in new lettings properties in the middle of last year, which came after the introduction of the additional rate of stamp duty in April 2016.
A slowdown in the rate of new supply also reflects the fact that fewer would-be vendors are becoming landlords as price declines in the sales market bottom out.
An analysis of Rightmove listings data underlines the trend. The number of listings above £2,000 per month between January and October 2017 in the borough of Westminster was 10% lower than the same period in 2016. The equivalent fall was 12% in the borough of Kensington & Chelsea.
There has also been speculation that recent tax changes would exert downwards pressure on supply as more landlords sell up. While the effect of this trend cannot be discounted, Knight Frank data shows little evidence so far in prime central London among what are typically more equity-rich landlords.
The number of landlords who re-let their property through Knight Frank in the year to October 2017 was 6% higher than the previous 12 months, according to an analysis of new tenancy agreements that excluded extension deals with existing tenants.
Knight Frank said that they expect rental value declines to continue bottoming out and forecast 0.5% growth in 2018 and 1.5% in 2019, based on the fact demand will remain relatively strong versus supply.
The ratio of new prospective tenants to new properties has grown from 2.9 in January to 3.3 in October. Previous cycles suggest that as this number surpasses 3.5, it is accompanied by positive rental value growth.
While supply continues to decline, demand continues to rise.
The number of new prospective tenants registering between January and October increased 16% and viewing levels were 19% higher than last year. Accordingly, the number of tenancies agreed in the first nine months of the year was 16.4% higher than 2016.
